Module 4: Tax Planning
What Module 4 tests
Module 4 covers personal income tax, deductions and credits, capital gains, investment taxation, tax-advantaged accounts, gift and estate tax basics, and planning timing. It tests jurisdiction-specific rules, so use the rules given in the exam's current tax tables.
Core rules
- Know the difference between marginal and effective tax rates; planning usually uses marginal rates.
- Taxable income = gross income - adjustments - deductions; credits reduce tax directly.
- Compare investments on an after-tax basis. Taxable equivalent yield = tax-exempt yield / (1 - marginal tax rate).
- Deferral and income shifting can add value, but avoid sham transactions. Document basis, holding periods, and records.
Worked example
A client in a 30% marginal bracket compares a 3.0% tax-exempt bond with a 4.5% taxable bond. Taxable equivalent yield of the exempt bond = 3.0% / (1 - 0.30) = 4.29%. The taxable bond yields 4.5% before tax, so it is slightly better on an equivalent-risk basis. If state tax applies or the client is in a higher bracket, the answer can reverse; the planner must also compare credit quality and liquidity.
Traps
Using effective instead of marginal rates; forgetting state or local taxes; ignoring thresholds and phase-outs; confusing deductions with credits; overlooking holding-period rules; recommending tax shelters without economic substance.